Musk Has Heavily Leveraged His Holdings Of Tesla While Tesla's Financial Leverage Has Risen

I was amazed at the reaction to my previous Forbes article on Tesla. By simply reading Tesla's 10-Q I was able to find a detail--on May 3rd the company added its Fremont factory to the collateral package supporting its revolving credit agreement--that most had missed and that other news services picked up on throughout the day Monday after my article appeared.

Why didn't sell-side analysts catch the fact that Tesla had mortgaged the company's most important physical asset? Well, to be fair, Tesla did not file its 10-Q until May 10th despite reporting earnings on the 2nd. Given the theatrical performance CEO Elon Musk delivered on Tesla's first quarter conference call that evening, though, no one should be surprised that not all pertinent information was divulged.

For many investors the calculus is simple; Musk is Tesla and Tesla is Musk. His roles as Chairman, CEO and largest shareholder are inextricably intertwined. That said, the extent to which Musk has used his stake in Tesla as collateral to support personal indebtedness is not necessarily well known. So, in the continuing spirit of forensic analysis, I decided to comb through Tesla's proxy statements to measure Musk’s level of personal leverage.

NEW YORK, NY - MAY 07: Business magnate Elon Musk enters the Heavenly Bodies: Fashion & The Catholic Imagination Costume Institute Gala at The Metropolitan Museum on May 07, 2018 in New York City. (Photo by Ray Tamarra/GC Images)

The figures are startling. As of year-end 2017 Musk was using more than 40% of his Tesla shares as collateral for loans. The 13.8 million shares Musk pledged as collateral amounted to a staggering $4.29 billion worth of Tesla stock based on TSLA’s closing price on December 29th. Obviously those figures are not reported in real-time, but market reports on Musk's much-hyped purchase of 33,000 Tesla shares last week--which amounted to a 0.1% increase in his total holdings of Tesla stock--are really inconsequential. The table below displays Musk’s Tesla holdings and borrowings against those holdings since the company’s IPO in 2010.

in millions

2010

2011

2012

2013

2014

2015

2016

2017

Musk shares pledged

4.5

4.500

9.470

10.025

7.425

9.420

11.451

13.775

Musk shares owned

25.7

27.132

27.203

28.289

28.289

28.371

33.504

33.632

Leverage Ratio (%)

17.51

16.59

34.81

35.44

26.25

33.20

34.18

40.96

TSLA total shs. out.

97.6

108.9

114.2

123.1

125.7

131.4

161.6

168.8

How is Musk using the money he has borrowed against his Tesla shares? The only hints as to the parameters of that leverage came from disclosures in Tesla's prospectus for its March 17, 2017 offering of equity and convertible notes. That document divulged that Musk had loans secured by his personal Tesla holdings from Morgan Stanley (one of the underwriters of the offering) totaling $344.4 million and from institutions not involved in the offering of another $279.9 million. It's impossible to know exactly how much Musk has borrowed against that collateral, but his penchant for start-ups--SpaceX, The Boring Company, Hyperloop One, etc.--is most likely consuming that cash.

The problem is that Tesla’s humongous cash burn--which I have chronicled in a series of articles for Forbes--has put the company itself in a precarious financial position. As the second table below shows, Tesla’s financial leverage is at recent highs. Negative cash flows necessitate more borrowing, and it is truly a vicious cycle.

$, mm

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

Total Debt

7,512

8,521

8,105

9,924

10,167

10,466

Equity

5,538

5,797

6,215

5,775

5,235

5,315

Leverage Ratio

1.36

1.47

1.30

1.73

1.94

1.97

So, Musk has steadily increased his personal leverage to a company that has been steadily increasing its financial leverage. That's a double whammy. It's too much financial engineering. In following other companies I have experienced situations in which a CEO faced margin calls as his company's share price dropped. It is not pretty, and obviously adds incremental selling pressure to an existing decline.

Leverage acts to increase returns on equity when times are good and to hasten the demise of indebted companies when times are bad. That's the key point here. Despite disrupting a century-old industry and creating the most important product in that industry in decades (the Model S) Tesla has never had good times in terms of cash flow. Musk has used his Tesla holdings as ballast to try and conquer the universe, not just this planet, but as 2008-2009 should remind us, too much borrowing can cause any company to fall to Earth.